In Japan, Abe Proposes Corporate Tax Cuts and Greater Role for Women

By Reuters

June 24, 2014

TOKYO — Prime Minister Shinzo Abe of Japan announced a package of measures on Tuesday aimed at increasing the country’s long-term economic growth, including phased-in corporate tax cuts and bigger roles in business for women and foreign workers, but applause from investors was likely to be muted after Tokyo backpedaled on bolder change.

Experts say the latest installment of his so-called third arrow of long-term economic policies, most of which had been signaled in advance, is a step in the right direction, but many want to see how those measures are fleshed out and put into effect.

Private economists forecast that the plan could increase Japan’s potential growth rate by 0.2 to 1.5 percentage points from its current level of about 0.5 percent. But they noted that such an effect would take time.

“Even after the government growth strategy is announced, various legislation must be enacted, and it will take time for companies to begin to act,” said Kenji Yumoto, vice chairman of the Japan Research Institute. “Therefore, it will be 10 to 20 years before the potential growth rate rises.”

Among the steps outlined so far is a future cut in Japan’s effective corporate tax rate — among the highest in the world — to below 30 percent over the next several years, and a promise to overhaul the $1.26 trillion Government Pension Investment Fund in ways more likely to reallocate additional money to stocks.

The Bank of Japan governor, Haruhiko Kuroda, a former senior Finance Ministry official, has warned against cutting Japan’s corporate tax rate without securing an alternative source of tax revenue, given the country’s huge public debt.

In a nod to the need for balance, the tax plan will seek to offset the cuts by broadening the tax base.

By dribbling out major elements of the package in recent weeks, the government hopes to avoid the disappointment that led to a sharp drop in Tokyo share prices when Mr. Abe announced the first installment of his third prong last June.

Mr. Abe’s package is a welcome move for the Bank of Japan. The central bank has called for bold government action to help sustain the current recovery, which has been propelled in part by monetary stimulus.

Earlier Tuesday, Mr. Abe urged the nation’s business leaders to do more to bolster the role of working women, a crucial part of the growth strategy that is seen as vital to address the shrinking work force in one of the world’s most rapidly aging societies.

The package also included steps to target the health care sector for growth, improve productivity through a “robotic revolution,” raise the number of highly skilled foreign workers and expand a foreign trainee program.

While experts say the goal of stabilizing the declining population at around 100 million will be difficult to achieve, the government has gone out of its way to say that moves to increase foreign workers are not an immigration policy.

“Considering the various difficult experiences in other countries, I think we must be cautious about accepting immigrants,” Mr. Abe said at a news conference.

Difficult and important details of many steps have been left to be worked out later, and several bold but politically contentious proposals have been watered down or omitted. For instance, early bold proposals on agriculture overhauls look to have been scaled back because of opposition from the powerful farm lobby.

Discussions on easing labor market rigidities to lift productivity yielded a plan to end paid overtime for workers earning the equivalent of at least $100,000 per year — about 4 percent of the work force. The sensitive question of whether to make it easier to fire workers was left for later debate.

Many central bank officials say the keys are now implementation and Mr. Abe’s commitment to meeting words with action.

“Abe’s ‘third arrow’ growth strategy seems to me like a dart not an arrow,” said Naoki Iizuka, an economist at Citigroup Global Markets Japan. “I hope he will come up with bolder plans ahead.”

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